102.04 Costing and Control of Labor - by MD - Monowar Hossain, FCMA, CPA, FCS, ACA

Class note for
CMA Professional Level –I

102:COA (Cost Accounting)
CMA
Professional Level –I
102: Cost Accounting
-Productivity and Labor Costs;
Class 102.04 -Costs included in Labor;
No. 5 Costing and Control of -Accounting for Labor;
Labor -Time Keeping,
-Computation of total payroll and Allocation of Payroll costs;
-Journalizing Labor Costs;
-Special Problems Relating to Accounting for Labor;
-Labor cost Control,
-Labor Turnover and Control of Labor Turnover;
-Learning Curve Theory.
Productivity and Labor Costs
Productivity: Productivity in economics refers to measures of output from production processes, per
unit of input
Total productivity = Output quantity / Input quantity
Output Total productivity = Output quality and quantity / Input quality and quantity
Productivity = ----------------
Input
Labor Costs
Wages paid to workers during an accounting period on daily,
weekly, monthly basis. Labor cost is the price paid for using
human resources.
Costs included in Labor
The principal labor cost is wages paid to production workers.

Wages are payments made on an hourly, daily, or piecework
basis. Salaries are fixed payments made regularly for
managerial or clerical services.
1. Timekeeping
Accounting for Labor; 2. Computation of total payroll
Accounting for labor by a manufacturer usually involves 3 (three) activities: 3. Allocation of payroll costs
Time Keeping,
Most large scale manufactures have a separate timekeeping section within a personnel department
whose function is to collect the hours worked by employees.
Time card (clock card) Provides a records of
total hours worked
Two source documents are used in timekeeping
each day by an
employee.
A form prepared daily by an employee for

each job worked on, including hours worked
and job description. The wage rate will be
inserted by the payroll department.
Page -61
Saturday, March 21, 2015
Md.Monowar Hossain FCMA,CPA,FCS, ACA
GM & Head of ICC, Agarani Bank Limited.
eMail: md.monowar@gmail.com
Class note for
The price paid for using

human resources are called Labor job ticket
Methods of Job Evaluation
labor cost. Job Evaluation : Job Evaluation is a technique of analysis and
From employees assessment of jobs to determine their relative value within the 1.Point Ranking Method
firm. It aims at providing a rational and equitable basis for 2. Ranking Method
differential salaries and wages for different classes of workers. 3. Grading Method
Method of Remuneration:
1) Time Rate system Merit Rating is the comparative evaluation and analysis of individual merits of the employees.
a) Flat time Rate c) Combination of Time and Piece rate
b) High wage system i) Gantt task and Bonus scheme
c) Graduated time rate ii) Emerson Efficiency system
2) Payment by Results iii) Point scheme
a) Piece rate system • Bedaux system
i) Straight piece rate • Haynes manit system
ii) Differential piece rate
• Taylor system d) Premium bonus plans
• Merrick system i) Halsey premium plan
b) Group Bonus System ii) Halsey weir premium plan
i) Budgeted Expenses iii) Rowan scheme
ii) Towne gain sharing scheme iv) Barth scheme
iii) Cost efficiency bonus v) Accelerating premium bonus scheme
iv) Priest man system e) Other incentive schemes
i) Indirect monetary incentive
• Profit sharing
• Co-partnership
ii) Non-Monetary Incentive
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Class note for
1) Time rate system = Hours worked x Rate per hour (Basic wages)
2) Piece rate system: i) Straight piece rate earnings = Number of units produced x Rate per unit
ii) Differential Piece rate
a) F.W. Taylor’s differential rate system

» 83% of piece rate when below standard
» 125% of piece rate when above or at standard
b) Merrick differential or multiple piece rate system
Efficiency level Piece rate

» up to 83% »Normal piece rate
» 83% to 100% » 110% of Normal rate
» Above 100% » 120% of Normal rate
iii) Gantt Task and Bonus system
Output Payment
» Below standard » Time rate (guaranteed)
» At standard » 20% Bonus of Time rate
» Above standard » 120% of ordinary piece rate
iv) Emerson’s Efficiency system
Efficiency Payment
» Below 66.7% » Hourly Rate
» from 6» Hourly rate (+) increasing bonus according to degree to 100% of efficiency
on the basis of step bonus rates
» Above 100% » Hourly rate (+) 20% Bonus (+) additional bonus of 1% of hourly rate for every 1%
increase in efficiency
v) Halsey Premium Plan = Basic wages + 50% of time saved x Hourly Rate
vi) Halsey Weir Premium Plan = Basic wages + 30% of time saved x Hourly rate
vii) Rowan Plan = Basic wages + Time saved x Basic Wage Time allowed
viii) Bedaus Point system = Basic wages + 75% x Bedaus point/60 x Rate/hr
ix) Barth’s System = Hourly rate x √Std time x Time taken
Labour Turnover:-
1) Separation rate method = Separation during the period
Average No. of worker’s during the period
2) Net labour T.O rate (or) Replacement method = Number of replacements

3) Labour flux rate = No. of separation + No. of replacement
Accounting Treatment
1) Normal Idle time = Charged to factory overheads
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Class note for
2) Normal but un-controllable = It should be charged to job by inflating wage rate.

3) Abnormal = It should be charged to costing P & L a/c
Computation of total payroll and Allocation of Payroll costs
Computation of total payroll: The payroll department’s primary function is to compute the total payroll
including gross amount earned and the net amount payable to employees after deduction. The
payroll department distributes the payroll and maintains records of employees’ earnings and other
information.
Allocation of Payroll costs : Using time cards and labor job tickets as a guide, the cost accounting
department must allocate the total payroll cost to individual jobs, departments, or products.

Journalizing Labor Costs
Weekly
Payrolls are generally prepared Semimonthly or
Monthly
The basic journal entries to record factory labor costs:
1. To record the payroll
Debit (Tk.) Credit (Tk.)
Work in process inventory (direct labor) xxxx -
Factory overhead control (indirect labor) xxx -
Payroll payable - xxxxx
xxxxxx xxxxxx
2. To record employee withholdings and pay the payroll
Payroll payable xxxxxx -
Employee withholdings payable - xxx
Cash / Bank (to employees) - xxxxx
xxxxxx xxxxxx
3. To record employer taxes and fringe benefits costs

Factory overhead control xxx -
Employer taxes and benefits payable - xxx
xxx xxx
Special Problems Relating to Accounting for Labor

Employee taxes
Employer taxes and fringe benefits costs
Shift premiums
Overtime premium
Minimum guaranteed wage and incentive plans
Idle time – when employees have no work to perform but
are still paid for their time.
Labor cost Control
The price paid for using human resources are called labor
cost.
Page -64
Class note for
Like material control, cost accountant has also genuine interest to control over the labor cost, but he
can not control labor like material control. Both decreasing the number of laborers and wages will
increase the cost of laborers because less no. of worker with fewer wages will produce less output and
its cost will be more. Suppose, you have to make your building, if you appoint only two laborer but it
require for laborer for saving the labor cost, it will be reverse effect be because no. of days will
increase and its is also risk of losing of other stock like cement etc. So, optimum use of workers is the
way to control the cost of labor. There are also many factors which affect labor cost control.
Factor affecting cost of labor

1. Assessment of man power
requirement
2. Time and motion study
3. Control over idle time and
overtime
4. Wage system
5. Control over labor turnover
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Class note for
Labor Turnover and Control of Labor Turnover:

Labor turnover is the rate at which an employer gains and loses employees. Simple ways to describe it
are "how long employees tend to stay" or "the rate of traffic through the revolving door." Turnover is
measured for individual companies and for their industry as a whole. If an employer is said to have a
high turnover relative to its competitors, it means that employees of that company have a shorter
average tenure than those of other companies in the same industry. High turnover can be harmful to
a company's productivity if skilled workers are often leaving and the worker population contains a
high percentage of novice workers.
Labor turnover means losing of laborers due to not providing good wages or incentive or any other
reason. It will increase the cost of training of new workers and also errors in production. So labor
turnover should minimize as soon as revealed.
Learning Curve Theory
When the product design remain same, nature of production is manual & production is of continuous
nature, than average labour time decreases with the increases in production volume. This is known as
Learning curve technique which measures labor-hours per unit ( i.e. average labor hour). It declines
with the increase in production because workers are learning and becoming better performer of the
jobs as they produce more & more units. Managers use learning curves to predict how labor-hours, or
labor costs, will increase as more units of same product are produced continuously.
Avg. Labour time

Now a days concept of
learning curve is applied
in the business functions,
in the value chain, such
as marketing, distribution,
and customer service.
Learning or experience curve
Units
It was first observed in aircraft assembly industry. In general, as workers become more familiar with
their tasks, their efficiency improves. It helps the managers learn to improve their scheduling of work
Page -66
Class note for
among the shifts in the plant , as a result of efficiency & productivity increases, unit costs decrease on
a non-linear cost function basis
Experience curves : Experience curves are very similar to learning curves. Learning curves deal only
with labor hours and therefore labor cost reducing by a predetermined percentage. But experience
curves cover all costs and yet they are very similar in percentage terms to learning curves. All costs
reduce with experience to some extent. Material costs may decrease slightly with quantity discounts
better utilization, etc., but will not decrease by a large amount. Variable overheads in general is a
labor base cost and so decrease in a similar way. Fixed overheads will decrease per unit as more units
are produced following Absorption costing.
Technique :
1. Learning Equation
y = axb y = the average time per unit for x units

a = the time for the first unit
x = the cumulative number of units
b = the learning coefficient = log of learning % ÷ log 2
So, log y = log a + b log x
2. The learning % is applicable with the time of 1st unit when production volume is doubled.
3. Total time = x . y = x . axb= a . x 1+ b
4. Apply the concept of Static cost & Reducible cost while prepare the Cost Sheet .
Example 1 :If the learning rate is 80% , find the learning co-efficient?
at 80% learning
b = log 0.8÷ log 2

-1. +0.9031 )
= ---------------------------------
0.3010
= - 0.3219
∴ Average time = y = ax –0.3219 at 80% learning rate
Example 2
Find Average Labor time & cost for producing 1,2,3,4 & 8 units when the time for first unit = 300 hours
learning rate is at 80%. Wage rate is Tk. 30 per hour.
Ans. Statement of Time & Cost

Units (x) Avg. time (hr.) Avg. cost (Tk.30/hr.) Total cost Different cost
1 300 9,000 9,000 --
2 240 7,200 14,400 5,400
3 210.6 6,318 18,954 4,554
4 192 5,760 23,040 4,086
8 153.6 4,608 36,864 13,824
(5th –8th)
10 142.95 4,288.5 42,885 6,021
(9th& 10th )
Page -67
Class note for
Note -1 Points to remember for Examination purpose

When x = 2. y = 300 & b =- 0.3219
1. You are always calculating the average labor time.
2. The nature of work is always manual.
∴Log y = log 300 –0.3219 log 2
3. When the production volume is double, apply
st
learning rate on time for 1 unit.
Log y = 2.4771 –0.3210 ×3010 4. Apply the concept of Static cost & Reducible cost to
= 2.3235 find cost of production.
5. Read the problem carefully to find the reducible cost
∴Y = Antilog (2.3235) .
= 210.6
Example-3
If the direct labor cost is reduced by 20% with every
doubling of output, what will be the average labor
cost for the sixteen units produced as an approximate
Note-2
percentage of the cost of the first unit produced?
When x = 4, y = 300 & b= - 0.3219
Log y = Log 300 –0.3219 Log 4 Solution: If reducible labor cost falls by 20% then
= 2.4771 –0.3219 = 0.6021 learning create reduces by 80%
= 2.2833
X % (after reduction)
∴Y = Antilog (2.2833) 1 100
= 192.0 2 80
4 64
8 51.2
16 40.96
Just-In-Time Purchasing Just-in-time (JIT) purchasing is the purchase of goods or materials such that a
delivery immediately precedes demand or use. Companies moving toward JIT purchasing argue that
the cost of carrying inventories (parameter C in the EOQ model) has been dramatically
underestimated in the past.
Just-In-Time Production Systems Just-in-time (JIT) production systems take a “demand pull” approach
in which goods are only manufactured to satisfy customer orders.
Major Features of a JIT System
1. Organizing production in manufacturing cells
2. Hiring and retaining multi-skilled workers
3. Emphasizing total quality management
4. Reducing manufacturing lead time and setup time
5. Building strong supplier relationships
Supply-Chain Analysis Supply-chain analysis describes the flow of goods, services, and information
from cradle to grave, regardless of whether those activities occur in the same organization or other
organizations.
Materials Requirement Planning (MRP) - Materials requirements planning (MRP) systems take a “push-
through” approach that manufactures finished goods for inventory on the basis of demand forecasts.
MRP predetermines the necessary outputs at each stage of production. Cost and management
accountants play key roles in an MRP system, including...
– maintaining accurate and timely information pertaining to materials, work in process,
and finished goods, and...
– providing estimates of the setup costs for each production run, the downtime costs, and carrying
costs of inventory.
Page -68
Class note for
LABOR COSTING FORMULAS
Gross pay Hours worked x rate per hour or number of units produced x rate per unit
Halsey scheme 50% of time saved x rate per hour
Halsey Weir scheme 1/3 of time saved x rate per hour
Rowan scheme (time taken/time allowed x time saved) x rate per hour
Time saved time allowed – time taken
Labor turnover Average no of employees leaving who have to be replaced x 100

Average number employed
Problem :22 - CMA Examination : Level-I, December-2009, Q4 [ Marks: ( 8 +7) = 15 ]

3M operates 5 days a week and 8 hours a day. Ajax Rosario, a semi-skilled worker, works at a
guarantee rate of Tk. 6 per hour. Standard production for Ajax is 192 units per day. Factory overhead
per labor hour Tk. 3. Production for the first week of June was 180, 200, 220, 224, 192 units for Monday
through Friday respectively.
(a) Compute conversion cost per unit under straight piecework plan;
(b) Compute conversion cost per unit under 100% bonus plan.
Ans.
(a) Straight Piecework Plan
Monday Tuesday Wednesday Thursday Friday
Units Produced 180 200 220 224 192
Piece Rate [(8 hours x Tk. 6 per hour ) / 192 units per day ] Tk. 0.25 Tk. 0.25 Tk.0.25 Tk. 0.25 Tk. 0.25
Earned (Units Produced x Piece Rate) or guarantee rate Tk. 48.00 Tk. 50.00 Tk. 55.00 Tk. 56.00 Tk.48.00
Labor cost per unit (Earned / Units Produced) Tk. 0.267 Tk. 0.250 Tk. 0.250 Tk. 0.250 Tk. 0.250
Overhead Cost per Unit [(Tk. 3 x 8 hours) / Units Produced ] Tk. 0.133 Tk. 0.120 Tk. 0.109 Tk. 0.107 Tk.0.125
Conversion Cost per Unit = (Labor cost p.u.+ O/H Cost p.u.) Tk. 0.400 Tk. 0.370 Tk. 0.359 Tk. 0.357 Tk. 0.375
(b) 100% Bonus Plan

Monday Tuesday Wednesday Thursday Friday
Units Produced 180 200 220 224 192
Standard Units 192 192 192 192 192
Efficiency Rate (units produced / std. units) or 1.000 1.000 1.042 1.146 1.167 1.000
*Per hour rate
(guarantee rate of Tk. 6 per hour x Efficiency Rate)
6.000 6.250 6.875 7.000 6.000
Earned (8 hours a day x *Per hour rate) Tk. 48.00 Tk. 50.00 Tk. 55.00 Tk. 56.00 Tk.48.00
Labor cost per unit (Earned / Units Produced) Tk. 0.267 Tk. 0.250 Tk. 0.250 Tk. 0.250 Tk. 0.250
Overhead Cost per Unit Tk. 0.133 Tk. 0.120 Tk. 0.109 Tk. 0.107 Tk.0.125
[(Tk.3x8hours)/Units Produced]
Conversion Cost per Unit
Tk. 0.400 Tk. 0.370 Tk. 0.359 Tk. 0.357 Tk. 0.375
= (Labor cost per unit + Overhead Cost per Unit
Page -69
Class note for
Problem :23- CMA Examination : Level-I August -2009, Q2 Marks: ( 10 +5 + 5) = 20

Mercantile Housing Ltd. is a house building concern that currently has 4 houses under construction.
Labor costs are assembled with the use of clock cards and time ticket. From the records, the payroll
clerk compiled the following data for the weekend on 7th July, 2009:
Employees Name Total weekly Job Nos. & Hours
clock hours 220 221 222 223
A 40 35 - 5 -
B (Supervisor) 42 - - - -
C 45 20 15 - 10
D 40 - - 30 10
E ( Indirect Labor) 40 - - - -
All employees are paid Tk. 14.90 per hour except B who receives Tk. 20.10 per hour. The customer who
is having House No. 220 wanted construction completed 2 months ahead of its schedule completion
date. The Mercantile construction agreed to the rush arrangement but required the customer to bear
the overtime charges. The only overtime sent on Job No. 220 this week was 3 hours of C’s time. All
other overtime was due to previous job slowdowns on account of weather.
Required:
(a)Prepare a statement showing the total amount of payroll and the total amount of take home pay
by each employee assuming 10% deduction for provident fund and 1 % deduction for Group Term
Insurance. The week is a 40 hours week.
(b) Journal entries for the payroll records and payment.
(c)A distribution of the payroll to the various Jobs and other appropriate accounts.
Ans.
(a) Mercantile Housing Ltd.
Deduction
Total
Overtime
weekly Regular Total Group Total
Employees Name Premium Provident Take home
clock Pay (Tk.) Payroll Insurance deduction
(Tk.) Fund (Tk.) Pay (Tk.)
hours (Tk.) (Tk.) (Tk.)
a b c d E f g h = (f+g) i= ( e – h )
= (c + d) = (e x 10%) = (e x 1%)
A 40 596.00 - 596.00 59.60 5.96 65.56 530.44
B (Supervisor) 42 844.20 40.20 884.40 88.44 8.84 97.28 787.12
C 45 715.20 29.80 745.00 74.50 7.45 81.95 663.05
D 40 596.00 - 596.00 59.60 5.96 65.56 530.44
E ( Indirect Labor) 40 596.00 - 596.00 59.60 5.96 65.56 530.44
Total 3,347.40 70.00 3,417.40 341.74 34.17 375.91 3,041.49
(b) Mercantile Housing Ltd.

Payroll 3,417.40 -
Accrued payroll - 3,041.49
PF payable - 341.74
Group Insurance Payable - 34.17
3,417.40 3,417.40
Page -70
Class note for
(c) Mercantile Housing Ltd.

Accrued payroll 3,041.49 -
Cash / Bank - 3,041.49
3,041.49 3,041.49
Problem :24
Bonus paid under the Halsey Plan with Bonus at 50% for the time saved equals the bonus paid under
the Rowan System. When will this statement hold good? Justify your answer.
Solution of problem no. 24
Bonus under Halsey Plan

50
= Standard wage rate × ----- × Time saved ………………………….. (i)
100
Bonus under Rowan Plan
Time saved
= Standard wage rate × ---------------- × Time taken ……………………….. (ii)
Time allowed
Bonus under Halsey Plan will be equal to the
Bonus under Rowan Plan when the following condition holds good
50 Time saved
Standard wage rate × -------- × Time saved = Standard wage rate x ------------------ x Time taken
100 Time allowed
1 Time taken
Or, ------- = ----------------------
2 Time allowed
1
Or, Time taken = ------- of Time allowed
2
Hence, when the time taken is 50% of the time allowed the bonus under Halsey and Rowan Plans is
equal.
Problem-25: (Labor Turnover)
M3 Ltd. Supplies you the following information: -
No. of workers at the beginning of the year 400

No. of workers at the end of the year 500
No. of workers resigned 35
No. of workers discharged 10
No. of replaced workers 40
Find out Labor Turnover Rate under Flux Method.
Page -71
Class note for
Solution of problem no. 25 (Labor Turnover)
Calculation of average no. of workers during the period:-
Average no. of workers = (No. of workers in the beginning of the period +

No. of workers at the end of the period)/2 = (400 + 500)/2 = 450
Labor Turnover Rate = (No. of workers left during the period +

No. of workers replaced during the period) /
(Average no. of workers during the period) x 100
= (45 + 40)/450 x 100 = 18.8%
Problem no. 26: (Management Information for Labor Turnover by different methods)
During October 2014, the following information is obtained from the HR Department of a manufacturing
company:
Labour force at the beginning of the month …… 1,900

At the end of the month…………………………. 2,100.
During the month:

Leftt………………………………………... 25 persons
Discharged ………………………………. 40 persons
During the month 280 workers were engaged out of which only 30 were appointed in the vacancy
created by the number of workers separated and the rest on account of expansion scheme.
Required:
Calculate the Labor Turnover by different methods (Additions Method, Separation Method, Replacement
Method and Flux Method).
Solution of problem no. 26: (Management Information for Labor Turnover by different methods)
Computation of Labor Turnover

[Additions Method:
Number of Additions / Number of average workers during the period = 280 / 2000 X 100 = 14%
Separation Method:
Number of Separations / Number of average workers during the period = (25+40) / 2000 × 100 = 3.25%
Replacement Method:
Number of Replacements / Number of average workers during the period=30 / 2000 X 100 = 1.5%
Flux Method:
= ½ [Number of Additions + Number of Separations] / Number of average workers during the period
= [½ (280 + 65) / 2000]×100 = 173/2000 X 100 = 8.63%
Note: Average number of workers in all the above methods is computed by taking
Opening number of workers + Closing number of workers / 2 = 1900 +2100 / 2 =2000
Page -72
Class note for
Problem-27: (Labor – Rowan Plan)
Calculate the earnings of a worker under Rowan Plan from the following particulars:
a. Hourly rate of wages guaranteed 0.50 paisa per hour.
b. Standard time for producing one dozen articles – 3 hours.
c. Actual time taken by the workers to produce 20 dozen articles – 48 hours.
Solution of problem no. 27 (Labor – Rowan Plan)

A. Wage rate per hour = 0.50
B. Standard time allowed = 3 hours per dozen
C. Actual production = 20 dozens
D. Standard time allowed for 20 dozens [B x C] = 3 hours x 20 dozens = 60 hours
E. Actual time taken to produce 20 dozens = 48 hours
F. Time saved [D – E] = 60 – 48 = 12 hours
Earnings = Normal Wages x Bonus

Under Rowan Plan :
(Actual Time Taken x Time Rate) + [Time saved x (Time taken/Time allowed) x time rate]
= (48 hours x 0.50) + [12 x (48/60) x 0.50]
= 24 + 4.80 = Tk. 28.80
Problem-28: (Labor – Taylors Plan)
Using a Taylor’s Plan, calculate the earnings of workers from the following information.
Normal rate per hour = Tk. 12
Standard time per piece = 20 minutes
In a 9 – hour day, A produces 26 units and B produces 30 units.
Solution of problem no. 28 (Labor – Taylors Plan)

Standard production per hour = 60 minutes/20 minutes = 3 units
Standard production per day = 3 units x 9 hours = 27 units
Piece rate = Tk. 12 / 3 units = Tk. 4 per unit
Lower price rate = Tk. 4 x 83% = Tk. 3.32
Higher Piece Rate = Tk. 4 x 125% = Tk.5
Efficiency of worker A = (26 units/ 27 units) x 100 = 96.30%
It is less than 100% and thus will be paid at lower piece rate of Tk. 3.32 per unit.
Wages of A = 26 units x Tk. 3.32 = Tk. 86.32
Efficiency of worker B = 30 units/27 units = 111.11%
It is more than 100% hence will be paid at the higher piece rate of Tk. 5 per unit.
Wages of B = 30 units x 5= Tk. 150
Problem – 29: (Labor – Working hours)

Using the details given below, you are required to calculate the earnings of workers X and Y and
subsequently allocate these earnings to the three Jobs A, B and C.
X Y
(a) Basic Wages Tk. 100 Tk. 100
(b) Dearness Allowance 50% 55%
(c) Provident Fund (on basic wages) 8% 8%
(d) Employee’s Group Insurance (on basic wages) 2% 2%
(e) Overtime 10 hrs. --
(f) Idle time and leave -- 16 hrs.
Page -73
Class note for
For your calculations, you may assume the following:

- Normal working hours for a month are 200 hours.
- Overtime is paid at double the normal wages plus dearness allowance.
- Employer’s contributions to State Insurance and Provident Fund are at equal rate with the
employee’s contributions.
- The month contains 25 working days and one paid holiday.
The two workers were employed on jobs A, B and C in the following proportions:
Job-A Job-B Jon- C
Worker X 80 60 60
Worker Y 100 40 60
Overtime was done on Job-B.
Solution of problem no. 29 (Labor – Working hours)

Computation of wages payable
____________________________________________
Worker –X Worker-Y
Tk. Tk. Tk.
-------------- --------------- ----------------
Basic Wages………………………………………. 100 100
Dearness Allowance ……………………………. 50 55
Overtime 10 hours @ Tk. 1.50 (note) ………….. 15 -
--------------- ----------------
Gross Wages 165 155
Less: Deductions
Employees’ contribution to PF (8% on basic wages (8)
Employees’ contribution to Group Insurance (2%) (2) (10) (10)
--------------- ---------------
Net wages Payable 155 145
========= =========
Allocation of Labor Cost to Jobs

____________________________________________
Worker –X Worker-Y
Tk. Tk.
--------------- ----------------
Gross Wages (excluding overtime wages)……. 150 155
Employer’s contribution to P.F. and GI. ………. 10 10
--------------- -------------------
160 165
========= ==========
Normal working hours per month……………… 200 hrs 200 hrs
ଵ଺଴ ଵ଺ହ
Labour cost per hour …………………………… =Tk. 0.80 =Tk. 0.825
ଶ଴଴ ଶ଴଴
Page -74
Class note for
Total Job A Job B Job C

Tk. Tk. Tk. Tk.
Worker –X --------- --------- -------- ---------
Ordinary wages…………………. 160.00 64.00 48.00 48.00
Overtime wages………………… 15.00 - 15.00 -
Worker-Y
Ordinary wages………………….. 165.00 82.50 33.00 49.50
--------- -------- -------- ---------
340.00 146.50 96.00 97.50
===== ===== ===== =====
Note: Calculation of overtime wages
Basic wages per month………Tk.100 Therefore, overtime rate is Tk.1.50 because overtime
Dearness allowance………… 50 is paid at double the normal rate.
------
150 Overtime wages for 10 hours @ Tk. 1.50 = Tk.15.
===
Normal working hours per month 200 hours
૚૞૙
Normal rate per hour = =Tk. 0.75
૛૙૙
Problem – 30
Muttakeen Ltd. is working by employing 50 skilled workers it is considered the introduction of incentive
scheme-either Halsey scheme (with 50% bonus) or Rowan scheme of wage payment for increasing
the labour productivity to cope up the increasing demand for the product by 40%. It is believed that
proposed incentive scheme could bring about an average 20% increase over the present earnings of
the workers; it could act as sufficient incentive for them to produce more.
Because of assurance, the increase in productivity has been observed as revealed by the figures for
the month of August, 2014.
Hourly rate of wages (guaranteed) …………………………………………………………….… Tk.30
Average time for producing one unit by one worker at the previous …………………….. 1.975 hours
Performance (This may be taken as time allowed)
Number of working days in the month ………………………………………………………………. 24
Number of working hours per day of each worker …………………………………………………. 8
Actual production during the month ………………………………………………………………. 6,120 units
Required:(i) Calculate the effective rate of earnings under the Halsey scheme and the Rowan
scheme.
(ii) Calculate the savings to the Muttakeen Ltd. in terms of direct labour cost per piece.
(iii)Which incentive scheme will be better?
Solution of problem no. 30
Note (a). Computation of time saved (in hours) per month:
= (Standard production time of 6,120 units – Actual time taken by the workers)
= (6,120 units × 1.975 hours – 24 days × 8 hrs per day × 50 skilled workers)
= (12,087 hours – 9,600 hours) = 2,487 hours
Page -75
Class note for
Note (b). Computation of bonus for time saved hours under Halsey and Rowan schemes:
Time saved hours [Refer to working note (a)]= 2,487 hours

Wage rate per hour = Tk. 30/-
Bonus under Halsey Scheme (With 50% bonus) = ½ × 2,487 hours × Tk.30/- = Tk. 37,305/-
Note (c).
Time saved
Bonus under Rowan Scheme = ---------------- × Time taken x rate per hour
Time allowed
2,487 hours
= ---------------- × 9,600 hours x Tk. 30/- = Tk. 59,258.38
12,087
(i) Computation of effective rate of earnings under the Halsey and Rowan schemes:
Total earnings (under Halsey scheme) [note-(b)] = Time wages + Bonus
= 24 days × 8 hours + 50 skilled workers × Tk. 30 + Tk 37,305
= Tk. 2,88,000/- + Tk. 37,305/- = Tk. 3,25,305/-
Total earnings (under Rowan scheme) [note-(b)] = Time wages + Bonus = Tk. 2,88,000 + Tk. 59,258.38
= Tk. 3,47,258.38
Tk. 3,25,305/-
Effective rate of earnings per hour under Halsey Plan = ------------------- = Tk.33.89
9,600 hrs
Tk. 3,47,258.38
Effective rate of earnings per hour under Rowan Plan = --------------------- = Tk. 36.17
9,600 hrs
(ii) Savings to the Muttakeen Ltd., in terms of direct labor cost per piece:
Tk.
Direct labor cost (per unit) under time wages system, (1,975 time per unit × Tk.30) = 59.25
Direct labor cost (per unit) under Halsey Plan, (Tk. 3,25,305 / 6,120 units) = 53.15
Direct labor cost (per unit) under Rowan Plan, (Tk. 3,47,258.38/6,120 units) = 56.74
Saving of direct labor cost under:
Halsey Plan (Tk. 59.25 – Tk. 53.15) = Tk. 6.10

Rowan Plan (Tk. 59.25 – Tk. 56.74) = Tk. 2.51
(iii) Advise to Muttakeen Ltd: (about the selection of the scheme):
Halsey scheme brings more savings to the management of Muttakeen Ltd., over the present earnings
of Tk. 2,88,000 but the other scheme viz Rowan fulfils the promise of 20% increase over the present
earnings of Tk. 2,88,000 by paying 20.58% in the form of bonus.
Hence Rowan Plan may be adopted.
Page -76
Class note for
Problem – 31:(Calculation of Profit Foregone under Labor Cost)
The management of MMH Ltd. is worried about the increasing Labor Turnover in the factory and
before analyzing the causes and taking remedial steps; they want to have an idea of the profit
foregone as a result of Labor Turnover during the last year.
Last year’s sales amounted to Tk. 83,03,300 and the profit/volume ratio was 20%. The total number of
actual hours worked by the direct Labor force was 4.45 lakhs. As a result of the delays by the
Personnel department in filling vacancies due to Labor Turnover, 1,00,000 potentially productive hours
were lost.
The Actual Direct Labor hours included 30,000 hours attributable to training new recruits, out of which,
half of the hours were unproductive. The cost incurred consequent on Labor turnover revealed, on
analysis the following.
Settlement cost due to leaving …………………….. Tk. 43,820

Recruitment costs…………………………………….. 26,740
Selection costs………………………………………… 12,750
Training costs………………………………………….. 30,490
Assuming that the potential production lost as a consequence of Labor Turnover could have been
sold at prevailing prices, find the profit foregone last year on account of Labor Turnover.
Required: Calculate the amount of profit foregone.
Solution of problem no. 31:(Calculation of Profit Foregone under Labor Cost)
We will have to calculate the profit foregone by calculating the amount of contribution lost and the
additional cost that was incurred as a result of the Labor Turnover. This is done in the following manner.
I. Actual productive hours = (Actual hours worked – Unproductive training hours)
= 4,45,000 – 15,000 [50% of 30, 000]
= 4,30,000 actual productive hours.
II. Total hours lost = 1,00,000 hrs (given)
[Tk.83,03,300 × 1,00,000]
Sales lost = ______________________ = Tk.19,31,000
4,30,000
Loss of contribution = 20% of Tk.19,31,000 = Tk.3,86,200
Statement Showing Profit Foregone
Contribution lost ……………………………………………… Tk. 3,86,200

Settlement cost due to leaving……………………………… 43,820
Recruitment cost …………………………………………….. 26,740
Selection cost ………………………………………………… 12,750
Training cost …………………………………………………. 30,490
Profit foregone ……………………….. 5,00,000
Page -77
Class note for
Problem – 32:(Calculation of the total earnings and labor cost per unit under Taylor, Merrick and Gantt
Task Bonus Plan)
X, Y and Z are three workers working in a manufacturing company and their output during a particular
40 hours week was 96, 111 and 126 units respectively. The guaranteed rate per hour is Tk.10 per hour,
low piece rate is Tk. 4 per unit, and high piece rate is Tk. 6 per unit. High task is 100 units per week.
Compute the total earnings and labor cost per unit under :
a. Taylor,
b. Merrick and
c. Gantt Task Bonus Plan.
Solution of problem no. 32:(Calculation of the total earnings and labour cost per unit under Taylor,
Merrick and Gantt Task Bonus Plan)
a) Taylor Plan:
High task is 100 units

Worker X = Actual output is 96 units, which is less than the standard.
This means he is inefficient and will get 80% of the normal piece rate i.e. @ Tk. 4.80 per unit.
Worker X wages will be = Tk. 4.80 × 96 units
= Tk. 460.80.
Worker Y = Actual output is 111 units which is more than the standard.
This means he is efficient and will get 120% of the normal piece rate i.e. Tk.7.20 per unit.
Worker Y wages will be = Tk.7.20 × 111 units
= Tk.799.20
Worker Z = Actual output is 126 units, more than the standard.

This means Worker Y wages will be = Tk. 7.20 ×126 units
= Tk. 907.20
(b) Merrick Plan:
Worker X = High task is 100 units, actual output is 96, this means that the efficiency level is 96%.
As per Merrick Plan, wages of X will be 110% of normal piece rate which is Tk.6.60 per unit
= Tk. 6.60 × 96 units
= Tk. 633.60
Worker Y = High task is 100 units, actual output is 111 units, efficiency level is 111%.
Y will be entitled for wages @ 120% of normal piece rate i.e. @ Tk. 7.20 per unit.
His wages will be = Tk. 7.20 × 111 units
= Tk. 799.20
Worker Z = High task is 100 units, actual output is 126 units, efficiency level is 126%.
Z will get at higher piece rate @ Tk. 7.20 per unit.
His wages will be = Tk. 7.20 × 126 units
= Tk. 907.20
Page -78
Class note for
(c) Gantt Task and Bonus Plan:
Worker X = Tk.10 × 40 hours = Tk. 400 [X will get guaranteed time rate as his output is below the high
task]
Worker Y = Tk. 6 × 111 units = Tk. 666 [High piece rate as output is above standard]
Worker Z = Tk. 6 × 126 units = Tk. 756 [High piece rate as output is above standard]
Problem–33:(Calculation of Time Rate, Piece Rate with a guaranteed weekly wage, Halsey premium
Bonus, Rowan Premium Bonus)
In MMH factory guaranteed wages at the rate of Tk.1.80 per hour are paid in a 48 hour week. By time
and motion study it is estimated that to manufacture one unit of a particular product 20 minutes are
taken, the time allowed is increased by 25% . During the week ‘A’ produced 180 units of the product.
Calculate his wages under the following methods:

(a) Time Rate.
(b) Piece Rate with a guaranteed weekly wage.
(c) Halsey premium Bonus.
(d) Rowan Premium Bonus.
Solution of problem no. 33:(Calculation of Time Rate, Piece Rate with a guaranteed weekly wage,
Halsey premium Bonus, Rowan Premium Bonus)
(a) Calculation of wages under Time Rate System
Earnings under time wages = (Time x Rate per hour)

= 48 × Tk. 1.8
= Tk.86.40
(b) Calculation of wages under Piece Rate with a Guaranteed Wage Rate
Normal Time for one unit = 20 minutes

(+) Relaxation allowance @ 25% = 5 minutes
Standard Time…………………… = 25 minutes
No. of pieces per hour = (60 ÷ 25) pieces.
Piece Rate = Hourly Rate ÷ No. of pieces per hour
= 1.8 ÷ (60 ÷ 25)
= 0.75
Earnings under Piece Rate = 180 x 0.75

= Tk.135.00
(c) Calculation of wages under Halsey Premium Bonus
Standard time for actual production = [180 x (25 ÷ 60)] = 75 hours
Earnings under Halsey Plan = (48 x 1.8) + [(50 ÷ 100) x (75-48)] x 1.8
= 86.4 + 24.3
= Tk.110.70
Page -79
Class note for
(d) Calculation of wages under Rowan Premium Bonus
Standard time for actual production = [180 x (25 ÷ 60)] = 75 hours
Earnings under Rowan Plan = (48 x 1.8) + (75-48 / 75) x (48 x 1.8)
= 86.4 + 31.104
= Tk.117.50
Problem–34:
The following inventory data relate to FARHANA Ltd.
Inventories
Opening Closing
Finish goods Tk. 1,100 Tk. 950
Work in progress Tk. 700 Tk. 800
Raw materials Tk. 900 Tk. 950
Additional information:-
Cost of goods available for sales = Tk. 6,840
Total goods processed during the period = Tk. 6,540
Factory on cost = Tk. 1,670
Direct material used = Tk. 1,930
Requirements:-
(i) determine raw material purchase
(ii) determine the direct labour and cost incurred
(iii) determine the cost of goods sold
Solution of problem no. 34:
(i) Raw material purchased:-
Raw material consumed = opening stock + purchases – closing stock
OR Tk. 1,930 = Tk. 900 + Purchases – Tk. 950
OR Tk. 1,930 + Tk. 50 = purchases
Tk. 1,980 = Raw material purchased
(ii) Direct labour cost:-

Cost of goods processed during the year = Tk. 6,540
Less: - Opening work in progress = Tk. 700
---------------
Tk. 5,840
Less: - Factory overheads = Tk. 1,670
---------------
Prime cost = Tk. 4,170
Less: - Raw material consumed = Tk. 1930
--------------
Direct labour cost = Tk. 2,240
(iii) Cost of goods sold:-

= cost of goods available for sales – closing stock finished goods
= 6840 – 950 = Tk. 5,890
Page -80
Class note for
Problem–35:
YEASMINE LTD. is undecided as to what kind of wage scheme should be introduced. The following
particulars have been compiled in respect of three systems, which are under consideration of
management:
A B C
Actual hours worked in a week 38 40 34

Hourly rate of wages Tk.6.00 Tk.5.00 Tk.7.20
Production in units:
Product- P 21 - 60
product -Q 36 - 135
Product- R 46 25 -
Standard time allowed per unit of each product is: P Q R

Minutes 12 18 30
For the purpose of piece rate, each minute is valued at Tk. 0.10.
Required: Calculate the wages of each worker under:

(i) Guaranteed hourly rates basis.
(ii) Piece work earnings basis, but guaranteed at 75% of basic pay (guaranteed hourly
rate) if his earnings are less than 50% of basic pay.
(iii) Premium bonus basis where the worker receives bonus based on Rowan scheme.
Solution of problem no. 35:
(i) Computation of wages of each worker under guaranteed hourly rate basis
Workers Actual hours Hourly wages

Worked in a week rate of wages (Tk.) (Tk.)
(a) (b) (c) (d) = (b) x (c)
A 38 6.00 228.00
B 40 5.00 200.00
C 34 7.20 244.80
(ii) Computation of wages if each worker under piece work earnings basis.
Worker A Worker B Worker C

Product Piece Rate per unit Units Wages Units Wages Units Wages
(Refer to working note 1) Tk. Tk. Tk.
(a) (b) (c ) (d)=(b)x(c ) (e) (f)=(b)x(c ) (g) (h)=(b)x(g)
P 1.20 21 25.20 60 72.00
Q 1.80 36 64.80 135 243.00
R 3.00 46 138.00 25 75.00
Tk. 228.00 Tk. 75.00 Tk.315.00
Page -81
Class note for
Since each worker has been guaranteed at 75% of basic pay, if his earnings are less than 50% of basic
pay, therefore, workers A and C will be paid the wages as computed viz, Tk.228 and Tk. 315
respectively.
The computed wage of worker B is Tk. 75, which is less than 50% of basic, pay viz. Tk.100, therefore he
would be paid 75% x Tk.200 or Tk.150.
Working Notes:
1. Piece rate/ per unit
Product Standard time per unit in Piece rate Piece rate

minutes Each minute Per unit
Tk. Tk.
(a) (b) (c) (d) = (b) x (c)
P 12 0.10 1.20
Q 18 0.10 1.80
R 30 0.10 3.00
2. Time allowed to each worker

Worker A = (21 units x 12 minutes)+ (36 units x 18 minutes) + (46 units x 30 minutes)
= (252 + 648 +1,380) minutes
=2,280 minutes = 38 hours
Worker B = (25 units x 30 minutes) = 750 minutes = 12.50 hours

Worker C =(60 units x 12 minutes )+ (135 unites x 18 minutes)
= (720 minutes + 2,430 minutes)= 3,150 minutes = 52.50 hours
(iii) Computation of wages of each worker under Premium bonus basis (where each worker
receives bonus based on Rowan Scheme)
Workers Time Time Time Wages Earnings Bonus Total of

Allowed taken saved rate/hour earning
Hours hours hours* earning
(Refer to Tk. Tk. Tk. Tk.
W. Note 2)
A 38.00 38.00 - 6.00 228.00 - 228.00
B 12.50 40.00 - 5.00 200.00 - 200.00
C 52.50 34.00 18.50 7.20 244.80 85.68 330.48
* (52.50 – 34.00 /52.50) x (34 x 7.20)
Page -82

102.04 Costing and Control of Labor - by MD - Monowar Hossain, FCMA, CPA, FCS, ACA

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102.04 Costing and Control of Labor - by MD - Monowar Hossain, FCMA, CPA, FCS, ACA

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Class note for

CMA Professional Level –I

Costs included in Labor

The principal labor cost is wages paid to production workers.

A form prepared daily by an employee for

The price paid for using

a) F.W. Taylor’s differential rate system

b) Merrick differential or multiple piece rate system

Efficiency level Piece rate

iii) Gantt Task and Bonus system

iv) Emerson’s Efficiency system

2) Net labour T.O rate (or) Replacement method = Number of replacements

2) Normal but un-controllable = It should be charged to job by inflating wage rate.

3. To record employer taxes and fringe benefits costs

Special Problems Relating to Accounting for Labor

Labor cost Control

Factor affecting cost of labor

Labor Turnover and Control of Labor Turnover:

Avg. Labour time

Learning or experience curve

y = axb y = the average time per unit for x units

b = log 0.8÷ log 2

Ans. Statement of Time & Cost

Note -1 Points to remember for Examination purpose

LABOR COSTING FORMULAS

Halsey scheme 50% of time saved x rate per hour

Halsey Weir scheme 1/3 of time saved x rate per hour

Time saved time allowed – time taken

Labor turnover Average no of employees leaving who have to be replaced x 100

Problem :22 - CMA Examination : Level-I, December-2009, Q4 [ Marks: ( 8 +7) = 15 ]

(b) 100% Bonus Plan

Problem :23- CMA Examination : Level-I August -2009, Q2 Marks: ( 10 +5 + 5) = 20

(b) Mercantile Housing Ltd.

(c) Mercantile Housing Ltd.

Solution of problem no. 24

Bonus under Halsey Plan

Bonus under Rowan Plan

Problem-25: (Labor Turnover)

M3 Ltd. Supplies you the following information: -

No. of workers at the beginning of the year 400

Solution of problem no. 25 (Labor Turnover)

Calculation of average no. of workers during the period:-

Average no. of workers = (No. of workers in the beginning of the period +

Labor Turnover Rate = (No. of workers left during the period +

Labour force at the beginning of the month …… 1,900

During the month:

Computation of Labor Turnover

Problem-27: (Labor – Rowan Plan)

Solution of problem no. 27 (Labor – Rowan Plan)

Earnings = Normal Wages x Bonus

Solution of problem no. 28 (Labor – Taylors Plan)

Problem – 29: (Labor – Working hours)

For your calculations, you may assume the following:

Solution of problem no. 29 (Labor – Working hours)

Allocation of Labor Cost to Jobs

Total Job A Job B Job C

Solution of problem no. 30

Note (a). Computation of time saved (in hours) per month:

Time saved hours [Refer to working note (a)]= 2,487 hours

Saving of direct labor cost under:

Halsey Plan (Tk. 59.25 – Tk. 53.15) = Tk. 6.10

(iii) Advise to Muttakeen Ltd: (about the selection of the scheme):